Ending Obamascare The Right Way

(Co-authored with Vikram Mansharamani, a Senior Fellow at the Mossavar-Rahmani Center for Business & Government at the Harvard Kennedy School and author of Boombustology: Spotting Financial Bubbles Before They Burst.)

The Chinese media is now reporting the Middle Kingdom's growing angst over America's political gridlock and the risk it poses for default on U.S. debt. Explicit default remains remote. But implicit default -- paying back our debt in watered-down dollars -- grows more likely every day.

Fiscally dysfunctional governments end up making money the old fashioned way -- by printing it. And these days, Uncle Sam, with the help of its "independent" central bank and the benign sounding words "quantitative easing," is printing 30 cents of every dollar he spends.

If our country's largest creditor, China, should wake up to how much money we're printing and start dumping its $1.3 trillion portfolio of U.S. Treasuries, politics as usual could have real economic costs.

Our country's political food fight would be less depressing were its tea partyers able to articulate real problems with their bête noir -- the Affordable Care Act. Instead, they simply proclaim this law, which provides health insurance to tens of million Americans, including 8 million children, the end of Western civilization.

What's in the tea these guys are drinking?

Who knows? But what we do know is that the Affordable Care Act, like our other health care programs -- Medicare, Medicaid and employer-based health care -- is terribly designed and could do real damage to the economy.

The answer, though, is not killing the health care law and all other government involvement in health insurance and relying on private insurance companies to stop cherry-picking the healthy and telling the rest of us to get lost. The answer and, indeed, the only real way out of today's political morass and fiscal nightmare, is to fix things from scratch.

Doing so is far easier than it seems. But before going there, let's consider the true problems with the health care law.

First, low and middle-income earners enrolled in the health exchanges will face an additional 20 to 27 cent tax on every extra dollar they earn. Come again?

Well, the government provides very large subsidies for participating in the health exchanges. But these subsidies are phased out over a very wide range of incomes -- from roughly $25,000 to $94,000 for a family of four. And the phase-out involves losing from 20 to 27 cents in your subsidy for every dollar you earn. This extra tax will hit workers who earn more in two ways: a reduced tax credit and an increase in the premiums they are required to pay for their plan.

If you add together all the marginal taxes low and middle-income earners already face (the Federal Insurance Contribution Act (FICA) taxes, federal income taxes, state income taxes and state sales taxes), you find that the Affordable Care Act puts the vast majority of American workers into a roughly 60 percent tax bracket. You don't have to be a right-wing supply-side nut to realize tax rates this high can affect work decisions.

Second, employers with 50 or more employees have a very large incentive to shut down their health insurance plans, pay the $2,000 fine for not covering their employees and send their employees to the health exchanges where most of them will collect the health insurance subsidies.

A family of four making $35,000 will get a subsidy somewhere north of $8,000. So the employer loses $2,000 and his employee picks up $8,000. That's a $6,000 difference that can be shared between these two parties. And $6,000 is almost one fifth of the worker's pay. The Affordable Care Act will, over time, produce a massive elimination of employer-based health care. This is not necessarily a bad thing, but it will happen at an unaffordable cost.

Massachusetts, which has been running a form of the Affordable Care Act for several years, hasn't seen employers shut down health plans. But it's much easier for a big company, like IBM, to shut down its health plan nationwide than in just one state. IBM, by the way, was the first company to kill off its defined benefit plan, leading virtually all of corporate America to follow suit.

Third, SMEs (small- and medium-sized employers) face a significant disincentive to hiring more employees -- hardly a welcome development in this time of economic malaise and lackluster growth. In particular, businesses with 50 or more employees must provide health insurance or, as we just noted, pay fines of $2,000 per employee. Given that SMEs are among the very few employers that regularly create jobs for the economy, why raise the cost of growth?